Quote of the Day: Dow Theory

“People don’t understand the significance of the ‘bear market signal’ of
November 21. I stated on Wednesday’s site (Nov. 21) that the breakdown of the
Industrials signaled THE EXISTENCE of a primary bear market. It didn’t signal
the beginning of a bear market, Wednesday’s action gave us the final word via
Dow Theory that a primary bear market was in force.

… A precept of Dow Theory is that neither the duration nor the extent of a
bull or a bear market can be predicted in advance. It is far easier to IDENTIFY
the end of a bull or bear market than it is to predict their end. Bull markets
tend to build extended and often deceptive tops while bear markets tend to build
more definite and identifiable and faster bottoms. Therefore, it’s usually
easier to identify the bottom of a bear market than it is to identify a bull
market top.

… I expect a lot of wild and confusing movements from the stock market in
the days ahead. But I remind subscribers that a rally here, even a powerful
rally, will not mean that the bull market has suddenly been reborn. This bear
market will not end in four months. But any rally here will allow subscribers to
‘trim their sails’."

 

-Richard Russell, Dow Theory Letters

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  1. peter from oz commented on Nov 26

    barry the man who invents a method to convince his clients to “trim their sails” after such a prolonged bull market will indeed have replaced Edison
    we have here extreme volatility particularly in the medium to wannabee resource stocks and people have had at least 3 to 4 opportunities since september to cash in or lighten up
    standard reasons are “cgt reluctance” “the stocks been good to me so far” “I know the ceo (other senior executive) and the coy has another good announcement soon” “the analyst from (underwriting broker has just upgraded the stock” etc etc
    plus c’est la meme chose plus ca change
    This little Bear will stick to Richard Russell rgds pcm

  2. Guy M. Lerner commented on Nov 26

    While many in the media espouse Dow Theory, it would really be nice to know what kind of predictive it really has; in other words, look at the signals in a real objective fashion; I suspect – and this is only a guess – that it probably about as good as any trend following strategy, which means you are late to the start of the party (because you wait for confirmation) and you give back too much in gains (because you wait for confirmation).

    Interesting how many in the media have become Dow Theorists of late.

  3. peter from oz commented on Nov 26

    oops (dear sophisticated readers)
    “plus ca change plus c’est la meme chose”

    (and they do)
    rgds pcm

  4. Ross commented on Nov 26

    So as I understand it, Mr. Russell called the bottom of the market in December 1974 using Dow Theory. From the low in 1974 (577) to the low in 1982 (787) would have yielded you a 36% return while inflation during those 7 plus years beat your brains out.
    I do not discount that we are in a bear market because inflation adjusted, the S&P is down from 2000. Always adjust your investment returns by the confiscation of the purchasing power of your currency…

    Hoard sugar.

  5. TexasHippie commented on Nov 26

    This has been a topic of frequent discussion on the Bonddad Blog (http://bonddad.blogspot.com/), though he admits that internet-based sectors of our economy may allow non-physical transportation of goods and services which aren’t accounted by Dow Theory. What do folks here think?

  6. ToothFairy commented on Nov 26

    Seems to me that the “non-physical transportation of goods and services” is a pretty small part of the total GDP of the economy.

  7. Ollie commented on Nov 26

    “non-physical transportation of goods”?

    Did Google invent a teleporter?

  8. Michael C. commented on Nov 26

    I’m lost here. Richard Russell turned bullish in May with very strong comments:

    “We saw something that is extremely rare [on April 20 and April 25], in fact I can’t remember ever having seen this before. What I’m referring to is that on those two dates all three Dow Jones Averages — Industrials closed at simultaneous historic highs. To me, a fellow steeped in Dow Theory for over half a century, this was like a clap of thunder… My take on the situation is that the stock market (and the Dow Theory) told us that an unprecedented world boom lies ahead.”

    Russell acknowledges that what he has written will surprise many who are accustomed to his long-standing caution about the stock market. He imagines that we will want to respond by saying “But Russell, you’re usually so conservative, so restrained. How can you possibly talk this way? Now you’re talking about a worldwide boom. Are you smoking something we don’t know about?”

    Russell’s response:
    “I stopped smoking over 40 year ago. No, I’m simply relating to you my interpretation of what the market is saying. I believe the markets talk in their own secret language. And when the market does something that has never been done before, that serves as a ‘kick in the pants’ for me. It’s telling me, ‘Russell, wake up. Something very unusual is going on. Get up out of your chair — and pay attention’.”

    Now I don’t subscribe to his newletter so I don’t know what happened or what he has been saying in the last 6 months. But wow, what a dramatic shift in opinion.

    What happened?!…

  9. Barry Ritholtz commented on Nov 26

    Conditions change, so Russell changed his position

  10. Michael C. commented on Nov 26

    I accept that. I guess I’m just surprised at the magnitude of the shift. From unprecendented world boom (perhaps in hindsight his interpretation was a bit far fetched) to bear market.

    But I’m not one to argue with the market either.

  11. Cherry commented on Nov 26

    Just print 10 trillion dollars. That will solve the problem.

  12. MarkTX commented on Nov 26

    Both the components/stocks that make up the Dow and the Transport indexes have changed through the years (just like the US economy)

    which to me would make the
    dow theory just like a lot of other theories/models/analysis/ ie…

    -the fed model
    -the third year lame duck president model
    -fundamental analysis, etc….

    they are only as good as your last trade…

    Futhermore, all these models really have not been tested fully in the

    “NEW GLOBAL ECONOMY” and whatever that will bring in the future

    To all, I say Caveat Emptor….

    “there is always a bear market out their somewhere.”

    And man, that last hour of trading
    was Brutal

    Time to hit happy hour and MNF

  13. TKL commented on Nov 26

    For Guy M. Lerner et al.,

    For more info on the Dow Theory, see Mark Hulbert’s recent Marketwatch.com column at http://www.marketwatch.com/News/Story/Story.aspx?column=Mark+Hulbert.

    Hulbert explains the theory’s buy and sell signals, and cites a study showing that the theory outperformed the market by an average 4.4% annually from 1930 through 1997.

  14. MarkTX commented on Nov 26

    One last note,

    looking at the final tallys

    GOOG = 666

    now thats an ender….(LOL)

    cheers

  15. Eric Sebille commented on Nov 26

    I cannot believe what I am hearing on CNBC, with idiots like Ron Insana(sp) saying that we are going to need to take the rates down a couple hundred points. Do they not understand why we are in the current situation we are in!! If they slash that much to try and prop stocks, I would hate to see what happens to the budgets of the average joe who is struggling with higher food and gas prices now. Does anyone remember when Gasparino was all over the analyst for suggesting a possible BK on CFC back in August. Where does CNBC get these jokers..between Kudlow, Cramer, the Fast Money crew, Ron Insana, Jim Goldman and Dennis Kneale I cannot help but laugh at these guys thinking is this the best crew CNBC has to offer. Other than Santelli, Haines and to some extent Liesman, they have a sorry bunch across the board.

  16. Northern Observer commented on Nov 26

    Here here Eric,
    I find CNBC is political economic news rather than straight economic news.
    For reality I go to Bloomberg or BNN (A canadian network, excellent for resource stock picks)
    I can only imagine how ludicrous the fox business channel is.

  17. Francois Theberge commented on Nov 26

    @Eric Sebille

    Until this morning, I would have agreed with you 100% about the stupidity of interest rates cuts at this juncture.

    But now, I’m not so sure it won’t be mandatory, if only to buy some time. The ripples of the excesses of financial engineering (CDO’s RMBS et al.) and regulatory torpor (to put it mildly) could easily crash the real economy, which, let’s not forget it, is based on access to credit, not only for consumers, but for businesses too.

    However, I would accept the need for several rate cuts ONLY if a complete restructuration of the financial regulatory system takes place at the same time.

    Somehow, I’m very pessimistic about that happening. Congress, the White House and Wall Street just don’t want to see how bad it is, how bad it could become and above all, imposing some limits to the creativity of a class that has become the biggest contributor to the political campaigns of the federal politicians.

    We’ll need lots of pain to force the actual establishment out of their blindness and oblivion.

    Francois

  18. ken h commented on Nov 26

    He can cut to zero if he wants? Won’t do much good. He is screwed either way.

    If you have a depreciating asset class, one that could depreciate as much as 50%, how is a rate cut going to help. Sure won’t spur foriegn investment. Fanny and Freddie are out Uh Oh??

    CNBC is fun to watch when Steve and Rick Spar. Rick eats his lunch on a regular basis and when he sits there shaking his head when Steve talks is priceless!

  19. Greg0658 commented on Nov 26

    Eric – since its everyman for himself
    and since birds of a feather flock together
    its every industry against every other industry

  20. Eric Sebille commented on Nov 26

    Well put Francois, as crazy as it sounds it seems Ron Paul is the only one that has his hands around the real problem. I thought Dennis Gartman was dead on in his segment on fast money tonight when he spoke of the individual investor still being too complacent. I think too many are expecting a big year end rally and are positioned for it and will go running for the gates as it does not materialize and the market will drop below 12,000. I am trying to stay mainly cash and am buying fxp in the upper 70’s and low 80’s and getting out in the upper 80’s lower 90’s.

  21. ken h commented on Nov 26

    Complacent? They are hoping for knife catchers Eric.

    It’s really pretty easy to do the math that most companies are not going to fare well going into the next few years. I relate it to housing which the NAR constantly driveled how RE never goes down. Guess it does. The Kneale types can spin it all they want but people can’t spend money they ain’t got.

    The key to me is that oil has to come down for there to be any light at the end of the tunnel. To me, the fundamentals are not there for 100 dollar oil, maybe 60?? not 100. You can look at all the trends you want but this country is dependant on oil and these prices push inflation. oil spikes, foriegn investors run, all while the dollar tanks when he lowers rates.

    I disagree that the economy tanks with no credit. No Goverment intervention is needed. Let the market do it’s will. You didn’t see these hedge managers offering extra money back did we?

  22. Eric Sebille commented on Nov 26

    Ken, I agree no gov’t intervention is needed, however, I am a realist and know the Charlie Rangle’s of the world will be in the press forcing the fed to mistakenly cut again, so I expect 50 bps in December, not that I believe it will do any good, but we may get a short pop between the Fed and PPT. Make no mistake about it, this Fed as much as they dont want to cut, will give in, with not only rate cuts, but I would expect a comprehensive attempt at a bailout, passing the tax bill to the rest of us.

    Another 200 bp’s in cuts over the next year and I do not see how oil gets back to 60 as the dollar will continue its free fall. It boggles my mind educated investors think the Fed can wave a magic wand and solve the problems at hand.

  23. Greg0658 commented on Nov 26

    heres another old saying – it takes money to make money – watch what this unchecked financial industry does to the common man ie: dam up the river, dry up the pond, starve out the critters, swing in and buy up the depressed land*, break the dam, pond refills, prosperous times return, profit 50 years – repeat

    25% of the common people taking it in the gut – 50% ride it out ok – 25% do great

    * lots more foreign money this time I think

  24. DavidB commented on Nov 27

    I cannot believe what I am hearing on CNBC

    I can’t believe you still watch CNBS

  25. Eric Sebille commented on Nov 27

    “I can’t believe you still watch CNBS”

    As painful as CNBC can be at times, it is much better than watching the long hair Willard, sit in a bar and talk about his revolution on FOX Business.

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